Nothing to Sneeze At

ASIAN MARKETS FARED BETTER than those in Europe and the U.S. last week, but the mounting threat of Severe Acute Respiratory Syndrome held Hong Kong down. The Hang Seng fell 3.4%. Meanwhile, the Korea Composite fell 3.4%, amid tensions on the peninsula. As the Japanese fiscal year moved into its final days, stocks predictably rose amid moves to shore up banks' balance sheets. The Nikkei 225 advanced 1%.

The disease, whose symptoms include high fever and difficulty in breathing, afflicts more than 1,400 people and has killed more than 50.

In his weekly Greed & Fear note, CLSA Emerging Markets strategist Christopher Wood wrote late last week that he had "never seen a more empty plane in Asia than the one which flew from Jakarta to Hong Kong this week, certainly much more empty than during the very worst times in the Asian crisis." Nor, apparently, had the strategist seen "emptier hotel coffee shops at peak times." For now, he said, he would maintain his "minor overweight" rating on the Hong Kong market.

Meanwhile, JPMorgan Chase economists William Belchere and Joan Zheng estimated that Hong Kong, whose economic growth depends heavily on service exports, could lose 0.2% to 0.5% of gross domestic product every month from the drop in tourism and private consumption. It's tough to estimate the likely impact on China (even though the virus originated, and has killed the greatest number of people, in that country). That's partly because media coverage is limited and the virus hasn't spread much beyond Guangdong and Beijing. "If the extent of public panic continues to be well contained, then the overall impact on the economy would be limited to 0.02% to 0.1% of GDP every month," Belchere and Zheng wrote. But if the Chinese public panics and stays home, expect more severe consequences.

What sectors would fare worst? Based on stock prices last week, that would be hotels, airlines, and retailers -- all susceptible already to Hong Kong's deflationary woes. The Shangri-La reported at least 1,400 rooms cancelled. A back-of-the-envelope calculation by the JPMorgan analysts suggest that's an estimated cost of HK$1.7 million (there are 7.8 Hong Kong dollars to every U.S. dollar). If you assume a 10% decline in passengers across the board for the airlines, the analysts figured, for
Cathay Pacific,
lost profits would tote up to HK$10 million; for
China Southern,
which is based in Guangdong, where the disease is most prevalent, HK$2.5 million; for
China Eastern,
HK$0.5 million. If retail sales dropped 20% a month, that would slice HK$7.25 million a month from
Giordano's
profits, HK$3.8 million from
Texwinca's
, and HK$2.43 million from
Esprit.
And of course, if property prices slid by another 10%, lop nearly 30% off 2004 forecasts.

Mind you, earnings estimates already are coming down as some analysts reckon consensus expectations for manufacturing margins are too high. That already was the view at ABN Amro. But last week, the bank reduced its forecasts for Hong Kong. Economists led by Eddie Wong wrote: "If SARS cannot be brought under control quickly, the Hong Kong economy may be damaged. It's not just about retail sales or tourist arrivals. The bigger potential problems are cutbacks in business travel, which would hit external trade, and the risk of the infection spreading to the industrial area in the Pearl River Delta," where most of Hong Kong's factories are located.

Wong and his colleagues cut their Hong Kong GDP growth forecast to 3.5% from 4%, but raised 2004's forecast to 5% from 4.5%, assuming the disease can be brought under control in the next month or so.

And already, global investors are starting to fret about the impact on Asia's big tech companies. Late last week, Singapore announced that 100 employees of
Motorola
may have been affected. Other cases included employees of
HSBC Holdings
and
Bank of East Asia.

Steve Werber, who runs the global technology portfolio for J.& W. Seligman from New York City, cancelled a big trip to Asia last week, in part because of the invasion of Iraq, but partly too because of the respiratory disease. "Mostly, our concern has been geopolitical," says Werber, who intends to resume the trip in a month or two. "But that's not to say that if the disease continues on at its current pace, it might not be a concern" to Asia's supply chain. "The nightmare is if they start having to close some factories in Southern China," related to Taiwanese companies who outsource for U.S. firms. That might include
Hon Hai Precision
as well as a host of other companies.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.